Statement by Samuel Itam, Executive Director for Liberia
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International Monetary Fund
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The drop in demand and commodity prices in Liberia is adversely affecting investment and exports in some key sectors. The staff report examines Liberia’s second review under the Poverty Reduction and Growth Facility and request for Waiver and Modification of Performance Criteria. The global recession is slowing Liberia’s post-war economic recovery. There is limited room for countercyclical fiscal action owing to high debt levels while monetary policy is constrained by high dollarization. In the mining sector, investment continues, and iron ore exports are expected to resume with the global economic recovery.

Abstract

The drop in demand and commodity prices in Liberia is adversely affecting investment and exports in some key sectors. The staff report examines Liberia’s second review under the Poverty Reduction and Growth Facility and request for Waiver and Modification of Performance Criteria. The global recession is slowing Liberia’s post-war economic recovery. There is limited room for countercyclical fiscal action owing to high debt levels while monetary policy is constrained by high dollarization. In the mining sector, investment continues, and iron ore exports are expected to resume with the global economic recovery.

Introduction

1. The Liberian authorities appreciate the ongoing support of Staff, Management and Executive Directors in tackling the tremendous challenge of rebuilding the Liberia economy following two decades of war. Rebuilding the economy is essential for boosting the capacity for job creation and poverty reduction that are critical to sustaining peace. Since 2005, the new regime has secured political, social and macroeconomic stability and undertaken significant reforms. However, the authorities have had to work under extremely tight budgetary conditions due to a sizable debt burden. Nevertheless, positive performance has been sustained and it is on this basis, together with the authorities’ strong commitment to continued strong program implementation, that we seek Executive Directors’ support for completion of this second review under the PRGF arrangement, and for the financing assurances review for the third disbursement under the PRGF.

2. Quantitative and structural performance criteria were met in the period through end-December 2008, albeit with some temporary deviations and a delay, for which waivers are being sought.

3. My authorities are in broad agreement with the assessment of the staff reports. We would like to make the following points for emphasis and clarification.

The Monrovia port

4. Consideration is being given to a new port rehabilitation project which will be instrumental in creating new jobs, helping to reduce business costs significantly and resuscitating trade flows with Liberia. The authorities have requested limited concessional borrowing for the port infrastructure, assuring that safeguards are in place. The borrowing would be consistent with treatment of other HIPCs, will not undermine debt sustainability after the completion point, and is directed at an urgent and important facility necessary to increase trade and economic activity. The authorities will involve the World Bank, with their advice for project feasibility and execution risks being an important safeguard.

Overall economic and program performance

5. The program has advanced significantly despite the global recession.

  • The fiscal program remains on track, with the revenue target exceeded in 2008/09 and the balanced budget target being maintained for 2009/10. Given the lack of fiscal space for a stimulus and enhanced safety nets, the tax policy package for 2009/10 will reduce the top marginal income tax rates to levels closer to regional rates, while sales tax will increase from 7 percent to 10 percent. The budget will be tight, necessitating increased expenditure efficiency and spurring efforts to enhance tax collection. The authorities will also need to scale up their appeal to donors for expanded budget support.

  • Given the high level of dollarization, there is little monetary policy flexibility. Broad exchange rate stability has been maintained and inflation has dropped from a peak of 26.5 percent in August 2008 to around 7 percent in March 2009. With the global recession, it is projected to decline further to an average of 2 percent in 2009. Progress has been made in bank supervision with off-site and on-site inspections now being conducted on a quarterly and half yearly cycle, respectively. In the foreign exchange market, sales and purchases auction regulations were approved and have been published. In the area of safeguards, the use of International Financial Reporting Standards for 2008 audited accounts is on track.

  • The sharp reduction in global interest rates has reduced the income of the Bank of Liberia significantly. Therefore, a review of the foreign exchange reserves investment policy is necessary to try to resolve this sizable challenge. The inability to better staff the Central Bank is also placing additional strain on current human and operational resources, and the authorities would benefit from enhanced TA and backstop support from the Fund and other donors at this time.

  • In addition to the establishment of the Anti-Corruption Commission, various measures have been taken to set up supporting institutions. These include the legal taskforce established in the Ministry of Justice which prosecutes cases resulting from the ongoing audits by the General Auditing Commission (GAC); and measures that are underway to establish a new criminal court to deal specifically with corruption cases. In addition, updated legislation that defines corrupt practices and provides a code of conduct that requires asset declaration by public servants and protects whistle blowers is awaiting passage.

Constrained budget

6. In so far as budget management is concerned, this is an especially difficult time as the authorities will be required to make a sizable debt service payment to the World Bank over the next twelve months that was not foreseen. Given the cash-based budget, the authorities are appealing for budget support to help create the critical fiscal space needed.

Support in mobilizing resources

7. The Ministries of Finance and Development are establishing a database to track aid to Liberia. The template used provides basic data on sources of aid, commitments and disbursements. We encourage staff to support the authorities in this exercise by liaising with partners to brief them on budget support and concessional financing needs and to facilitate the supply of the required data.

Completion point

8. A critical trigger for the completion point is the implementation of the new public financial management (PFM) law and supporting financial regulations. The authorities expect the law to be in place this month. Also, the Anti-Corruption Commission became fully operational in December 2008. Given the urgent need for debt relief and the associated fiscal space, the authorities would like the completion point to be reached by end-2009, being fully aware that they would have to demonstrate that the new PFM law is effective in all its essential elements. The authorities appreciate the continued support and guidance of the Fund and donor partners as they work to achieve this. Also, my authorities note that for the completion point to be reached by end-2009, the Anti-Corruption Commission may not have been in operation for the full 12-month period earlier envisaged. It is in this regard that they would value the due consideration and flexibility of Executive Directors. Securing the completion point will be key in resolving the country’s debt overhang decisively and providing the current administration with the political mileage needed to sustain the reform program. It will also give the authorities a little more flexibility as they respond to the impacts of the global crisis over the next two years.

Conclusion

The authorities remain strongly committed to prudent economic and financial policies. Continued strong donor support is critical to achieving the program objectives. In this regard, we encourage donors to sustain and enhance their support in order to build on progress so far and to help ensure that the current administration delivers a visible peace dividend. In particular, budget support to tide the country through the current global crisis and disbursements to support the operations of the Anti-Corruption Commission would be of significant benefit to the program.

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Liberia: Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Request for Waiver and Modification of Performance Criteria, and Financing Assurances Review: Staff Report; Staff Supplement; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Liberia
Author:
International Monetary Fund